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December 29, 2007

Economist's View - 3 new articles

"Democrats and the Meanings of Change"

In an introduction to a recent column, Paul Krugman wrote:

Broadly speaking, the serious contenders for the Democratic nomination are offering similar policy proposals... But there are large differences among the candidates in their beliefs about what it will take to turn a progressive agenda into reality.

At one extreme, Barack Obama insists that the problem with America is that our politics are so "bitter and partisan," and insists that he can get things done by ushering in a "different kind of politics."

At the opposite extreme, John Edwards blames the power of the wealthy and corporate interests for our problems, and says, in effect, that America needs another F.D.R. — a polarizing figure, the object of much hatred from the right, who nonetheless succeeded in making big changes.

Thomas Palley agrees that, for Obama, "change is a matter of political style," but he says there are key policy differences among the candidates that have not received the attention they deserve, partly due to intentional "bunching" of policy by the Clinton campaign:

Democrats and the Meanings of Change, by Thomas I. Palley [via email, no link yet]: Many people now believe the United States cannot afford to continue with the policies of the Bush – Cheney administration. Those policies have undermined global support for America that is a key part of national security, and have produced an economic expansion that has by-passed working families and looks like bequeathing years of house price pain.

However, if there is agreement that the heavy-fisted Bush-Cheney agenda is no longer acceptable, the question remains what will follow. Among Democratic presidential candidates, though there is much talk of change, its meaning remains unclear.

Beginning some thirty years ago, Ronald Reagan initiated a fundamental re-positioning of American politics that was later completed by Newt Gingrich, Dick Armey, and Tom Delay. That re-positioning shifted the entire political spectrum to the right.

This raises the question does change mean sticking with the political playing field we now have and just giving control of the football to new Democrats like Senator Hilary Clinton? Or does it mean re-positioning the playing field and shifting the political spectrum as proposed by progressive Democrats like Senator John Edwards?

Behind this difference lie vital real world consequences that will profoundly impact America's working families. For Clinton-style centrists, today's economy works reasonably well. Globalization delivers prosperity by providing cheap imports that lower prices; financial boom on Wall Street benefits all by raising stock prices; and higher corporate profits drive investment that increases growth and incomes. However, growth also creates losers which means the market's "invisible hand" must be accompanied by a "helping hand". Consequently, there is need for policies to supplement the incomes of the working-poor and to assist workers who lose their jobs because of trade.

For Edwards-style progressives the picture is very different. Globalization has created a divide between country and corporations, with companies abandoning the U.S. by shifting jobs and investment offshore. That maximizes profits but undermines wages and future prosperity. Higher profits have not raised growth, but have instead come at the expense of wages and increased income inequality. And Wall Street has spearheaded these changes by demanding that companies raise rates of return and rip up the old social contract with workers and their communities.

From a progressive standpoint the problem with new Democrats is they tackle symptoms, not causes. Though helping hand social policies are welcome, progressives believe such policies are not up to the challenge confronting America's working families. Meeting that challenge requires deeper change, which is what the 2008 election is all about.

Yet, surfacing this difference has proved difficult. That is because the Clinton campaign has used the political tactic of "bunching" to obscure differences. That holds for every major issue from healthcare, to trade policy, to taxing Wall Street hedge fund incomes. On each issue the Clinton campaign has bunched up and signed-on, but always reluctantly and late.

This tactical effectiveness of bunching requires progressives to raise directly the question of change and its meaning. For Senator Obama change is a matter of political style. For Senator Clinton it means restoring the economic policies of the 1990s. However, with the exception of tax cuts, those policies are the policies of today. Thus, the 1990s ushered in NAFTA and free trade with China, and cemented trends from the 1980s regarding trade deficits, the separation of wages from productivity growth, and the dominance of Wall Street. What really saved the 1990s were the Internet and stock market bubbles, which is not a sustainable foundation for prosperity.

The 21st century has gotten off to a rocky start with America squandering much political and economic capital. Now, Americans want change. The Democratic primaries offer competing visions of change. One changes possession of the political football, the other changes the football field. That's the debate the country needs, and it seems to be finally bubbling to the surface in the last days if the Iowa campaign.

I think the important distinction is between tackling symptoms (outcomes) and tackling causes. Is it enough to revamp the social safety net within the current economic structure, or does the structure itself need to be changed?

I think action on both fronts is needed, but my preference is to let market processes work without interference and then use the social safety net and other devices to correct distributional inequities ex-post.

But that is not to say that the structure itself does not need to be changed. When I say "market processes", I mean competitive markets, I don't mean monopolized markets, or markets that do not fully internalize costs, or markets that are manipulated through the political process, etc. Broadly, I am particularly concerned about the balance of power between firms and workers, i.e. that the labor market is not competitive and hence does not have the optimality properties we expect from well-functioning markets, that more should be done to cause firms to internalize environmental externalities, that firms have more political clout than workers, that opportunity is not equal, particularly educational opportunities and this limits mobility between economic classes, that there is too much concentration of ownership in key industries such as (but not limited to) the media, and that we are not paying enough attention to our domestic infrastructure needs. Plus all the ones I forgot.

Structural change to the economy, along with needed reform of the social safety net in areas such as health care, won't come without fierce resistance from the other side. Change, even change that is centrist in nature, will require a difficult political battle and there won't be a lot of time for learning on the job. I don't believe that a cooperative, compromise approach to policy will be successful in bringing about the change that is needed and I hope the Democratic nominee, whoever that might be, will be prepared to begin the difficult battle ahead of them from day one of their administration.

Update: From Paul Krugman, a link to more discussion along these lines:

I won't write any more about this, by Paul Krugman: But I'll link to Lambert, who channels me admirably.

Capping Malpractice Payments

The costs of capping malpractice payments fall disproportionately on low-income workers, children, and the elderly:

Lacking lawyers, justice is denied, by Daniel Costello, Los Angeles Times: ...In 1975, California enacted legislation capping malpractice payments after an outcry ... that oversized awards and skyrocketing insurance rates were driving physicians out of the state.

The law limited the amount of money for "pain and suffering" ... to $250,000. There is no limit on what patients can collect for loss of future wages or other expenses.

Over the years, it has been easy to quantify the effects of the law, known as the Medical Injury Compensation Reform Act, or MICRA. In the years since the law was enacted, malpractice premiums in California have risen by just a third of the national average, and doctors say the law now helps attract physicians to the state. Proponents also say it discourages frivolous lawsuits.

Thirty states have enacted similar legislation. Two Republican presidential candidates -- Mitt Romney and Rudolph W. Giuliani -- have recently endorsed the approach as a possible national model.

It's been harder to tally the law's costs. Critics say it is increasingly preventing victims and their families from getting their day in court, especially low-income workers, children and the elderly. Their reasoning: The cap on pain and suffering has never been raised nor tied to inflation.

Meanwhile, the costs of putting on trials are often paid by attorneys and continue to rise each year. That means those who rely mainly on pain and suffering awards -- typically people who didn't make much money at the time of their injury -- are increasingly unattractive to lawyers.

Several states have set their malpractice caps considerably higher than California's because of worries that they affected poorer patients the most. Some state courts have begun to examine the fairness of their malpractice laws, especially those not tied to inflation. ...

A 2003 Rand Corp. report found that the law has reduced jury awards by 30%, and that the savings have come largely at the expense of severely injured or impaired patients.

On average, California juries (which are rarely informed of the cap during trials) awarded $800,000 in malpractice death cases from 1995 to 1999, but the amounts were later reduced to $250,000 under the law. This suggests that medical malpractice victims and their families could be reaping much larger payouts... But proponents of MICRA say raising the cap could harm patients.

"Raising the MICRA cap would significantly increase healthcare costs, limiting patient access to doctors, hospitals and clinics throughout California," said Lisa Maas, executive director of ... a trade group. "MICRA protects patient access to healthcare." ...

The link between malpractice payouts and increases in doctors' insurance premiums, though, remains unclear. One of the largest studies done on the topic -- by Dartmouth College researchers in 2003 -- concluded that malpractice payments had risen in line with medical care costs, whereas doctors' insurance premiums grew far faster -- by double-digit percentages annually for some specialties.

To some, that suggests that recent malpractice premium increases may have had more to do with insurers' business models and financial investments -- including documented losses in their investment portfolios in recent years -- than with their core businesses. ...

Do malpractice awards increase healthcare costs? From the CBO:

Limiting Tort Liability for Medical Malpractice: To curb the growth of premiums, the Administration and Members of Congress have proposed several types of restrictions on malpractice awards. ... Limits of one kind or another on liability for malpractice injuries, or "torts," are relatively common at the state level: more than 40 states had at least one restriction in effect in 2002.

Evidence from the states indicates that premiums for malpractice insurance are lower when tort liability is restricted than they would be otherwise. But even large savings in premiums can have only a small direct impact on health care spending--private or governmental--because malpractice costs account for less than 2 percent of that spending. Advocates or opponents cite other possible effects of limiting tort liability, such as reducing the extent to which physicians practice "defensive medicine" by conducting excessive procedures; preventing widespread problems of access to health care; or conversely, increasing medical injuries. However, evidence for those other effects is weak or inconclusive.

So the argument that lack of malpractice limits "would significantly increase healthcare costs" seems fairly weak.

The CBO report also summarizes the efficiency and equity issues involved in caps:

Issues surrounding the effects of the malpractice system and of possible restrictions on it can be viewed as questions of economic efficiency (providing the maximum possible net benefits to society) and equity (distributing the benefits and costs fairly).

Fairness is ultimately in the eye of the beholder. But the common equity-related argument for malpractice liability is that someone harmed by the actions of a physician or other medical professional deserves to be compensated by the injuring party.

The efficiency argument is that, in principle, liability (as a supplement to government regulations, professional oversight, and the desire of health care providers to maintain good reputations) gives providers an incentive to control the incidence and costs of malpractice injuries. In practice, however, the effect on efficiency depends on the standards used to distinguish medical negligence from appropriate care and on the accuracy of malpractice judgments and awards. If malpractice is judged inaccurately or is not clearly defined, doctors may carry out excessive tests and procedures to be able to cite as evidence that they were not negligent. Likewise, if malpractice is defined clearly but too broadly or if awards tend to be too high, doctors may engage in defensive medicine, inefficiently restrict their practices, or retire. Conversely, if doctors face less than the full costs of their negligence--because they are insulated by liability insurance or because malpractice is unrecognized or undercompensated--they may have too little incentive to avoid risky practices. For all of those reasons, it is not clear whether trying to control malpractice by means of liability improves economic efficiency or reduces it.

The report concludes with:

In short, the evidence available to date does not make a strong case that restricting malpractice liability would have a significant effect, either positive or negative, on economic efficiency. Thus, choices about specific proposals may hinge more on their implications for equity--in particular, on their effects on health care providers, patients injured through malpractice, and users of the health care system in general.

There is reason to be concerned about the equity of limiting award payments as compensation for injuries, i.e. of having payments that are too low when injury or impairment is severe, particularly since there are no discernible efficiency gains from the restrictions. But there is also another reason to be concerned about equity. If, as claimed above, there are costs from the restrictions on awards that fall mainly on low-income workers, children, and the elderly, then that should also raise questions about the fairness of the restrictions.

links for 2007-12-29

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